Just how much is changing in the world of asset management?
The more things change, the more they are the same. In recent years, one might be led to believe that there has been a bloody revolution in financial services. There is a new ABC, and it’s algorithmic, blockchain and crypto. As the last of the millennials enter the workforce, it’s easy to think that the new financial services paradigm built on fintech literally comes with a go faster Stripe. Yet one segment of the financial services market, asset management, seems to be somewhat untouched by the finger of fintech, but this may be about to change.
Those millennials now leaving college and entering the workforce are doing so with the feeling and actuality of being less well-off than their parents. As their parents approach retirement, it heralds the largest wealth transfer in history. US millennials alone will receive about $30 trillion in assets from their parents, of which a whopping 30% will be in liquid assets. That’s potentially a windfall of $10 trillion for asset managers.
Unfortunately, the asset management sector faces three major barriers to capitalising on this potential good fortune: psychographics, technographics, and economics. There is also increasing evidence that millennials have different financial objectives and expectations than previous generations. They are not interested in beating benchmarks and want their financial advisor to help them meeting their personal and financial goals. They are also more price-sensitive and prone to try alternative solutions offered by new entrants and are therefore hard to retain.
From RTÉ Radio 1’s Morning Ireland, a report on more than 100 British based asset managers and funds who have applied to the Central Bank to move to Ireland because of Brexit
“The number one challenge for asset managers today is the democratisation of value to investors”, says Barry Gill, Head of Active Equities at UBS Asset Management. “In the past, you had to pay relatively high fees for some value proposition from actively managed funds. Nowadays many people, when buying equities, they only want to get the market return. This migration from active to passive has started in the 1970s, but it has boomed post-2008”
The asset management customer base has historically belonged to an older demographic expecting less frequent interaction with their asset manager. As digital natives become older, asset managers may be disintermediated from their customers by technology. Millennials are comfortable using technology so it’s no surprise that fintech solutions like robo-advisors are so attractive.
This does not mean millennials don’t value financial advice anymore. They prefer digital interaction to traditional face-to-face meetings with their advisers wherever possible, particularly for less value-added tasks, but still prefer human interactions for more “holistic” encounters that would help them face their financial challenges. Millennials expect asset managers to tailor investments strategies to their own objectives and to deliver a better customer experience through a unique combination of digital and human interactions.
Regardless of age or generation, investors will put their money where they get the biggest return with the least risk
There is also an economic challenge because asset management is just not as profitable as it used to be. The financial crisis heralded in a new era of transparency and regulation, shining a light on an industry that has been (too) opaque for a long time, and transparency comes with a cost.
In addition, asset managers face greater competition not only from new entrants but the democratisation of data. As Daniel Gerard, Head of Advisory at State Street, points out “democratisation of data and the ability to participate in and evaluate opportunities have been and will continue to be major disruptors to existing models. As a result, we will continue to see a narrowing of the gap between commoditised betas vs non-commoditised betas. This trend, combined with the increase in both supply and demand for commoditised betas, is particularly beneficial for consumers of asset management, but this development in the cost/revenue model of asset managers will continue to be a major risk factor for the industry overall”.
Traditional asset management is being threatened by agile fintech startups with no legacy IT baggage, with systems designed by and for a new generation of consumers. Will traditional asset managers be left behind? Probably not. Why? The answer seems to be a combination of sizzle and steak.
Size still matters in finance. While fintech startups are smaller and agile, they need access to market. Large progressive asset managers are leveraging their access to market to neutralise the threat of new entrants through technology partnerships. This provides a much-needed sizzle to the millennial market.
While not as sexy as robo-advisors and Blockchain, something like AI can optimise every activity in the asset management value chain from client onboarding to advice, portfolio management, etc. When it comes to investment strategies in particular, AI-driven solutions provide unique opportunities. They lower costs associated with portfolio management so that asset managers can start bringing the new generation into the funnel earlier and gain their trust before wealth gets transferred to them. AI algorithms can also be adapted to reflect the risk-return and investment preferences of specific client segments and these solutions would respond to the customisation requirements which are typical of the new generation.
Lastly, properly designed AI algorithms can absorb and quickly process large amounts of information which could provide constant access non-commoditised betas. These benefits are attractive for asset managers as they reduce costs and increase revenues.
The more things change, the more they remain the same
Man Group Plc. quintupled the assets under management of their algorithmic fund in a three-year window once they could systematically prove their AI could consistently beat the market. At the end of the day, asset management is about one thing: making money. The one thing that does not change is that capital flows to the most effective asset manager. Regardless of age or generation, investors will put their money where they get the biggest return with the least risk. The more things change, the more they remain the same.
Author: Dr Pierangelo Rosati
The views expressed here are those of the author and do not represent or reflect the views of RTÉ